A new paper forthcoming in the journal American Economic Review: Insights estimates the effect of trade with China on American consumers and shows us what we stand to lose if we don’t end the trade war.
In “Estimating US Consumer Gains from Chinese Impoumerrts,” economists Liang Bai of the University of Edinburgh and Sebastian Stumpner of the University of Montreal and the Bank of France study price data from the Nielsen Homescan panel to find that trade with China reduced the prices Americans paid for consumer tradables by 0.19 percentage points per year. You can download a draft of the paper here.
Bai and Stumpner argue that about a third of the consumers’ gain from trade with China comes from greater product variety while the other two-thirds come from lower prices for the goods people were already buying.
Another way to put it is that inflation was lower–prices didn’t rise as rapidly–because of trade with China. The effect they estimate was roughly similar across income categories, though it is reasonable to think further research may uncover somewhat larger effects on lower-income households who spend more on tradables than higher-income households. Their study is unable to distinguish a difference across income groups, but such a finding would be roughly consistent with what my co-authors and I found in a study of the relationship between Walmart Supercenters and food security ($0 version available here, summarized for VoxEU here).
The direction of the result won’t surprise economists, who have argued for centuries that international trade helps a country’s citizens by making it possible for them to get more with every hour of their hard-earned labor. Their estimate allows us to be more precise when comparing the costs and benefits of different trade policies–and specifically, it will allow us to be more specific about the costs of President Trump’s “trade war” with China–if ever there was a phrase that is an oxymoron, it’s “trade war”–which Paul Krugman recently described as a “quagmire.” In response to failed, economically-innumerate trade policy, the President is pursuing…more economically-innumerate trade policy that is practically guaranteed to fail.
This paper is an important and timely contribution as the world is turning away from cosmopolitan economic liberalism and embracing the anti-economics of populism and nationalism. The basic economics of tariffs and trade are simple enough, and consumers, ultimately, are the ones who pay for all this “winning” via, as Bai and Stumpner show, lower selection and higher prices.
[Originally Published at Forbes]